Questions about Two-Pot? Here’s a simple breakdown

Published on 25th September, 2024 at 01:01 pm

The new Two-Pot system is almost here. From 1 September 2024, your retirement savings will be split into a vested, savings and retirement component. It’s important to know what to expect and its effect on how you access your retirement savings. We’ve broken down the key concepts with simple examples so you can grow your financial confidence.
Reading time: 4 minutes

In this guide, you’ll learn:

• The basics of the new Two-Pot system
• Examples of how it works
• Important considerations to keep in mind

Part 1: The basics of the new Two-Pot system

Two-Pot in a nutshell

The Two-Pot system is a national reform that will allow people to access part of their retirement value before actually retiring.
Funds go into two “pots”: retirement and savings.

The rationale

To support long-term retirement savings while assisting people with financial stress. The hope is to also discourage people from resigning in order to access all their retirement funds early, whether to pay off debt or address other financial crises.

So, in other words…

Withdrawals from the Two-Pot system are intended for emergencies, to help keep employment in the country up and avoid people taking on more debt.
Emergencies may include dealing with medical expenses or retrenchment.

Who does it apply to?

Everyone from both the private and public sectors who contribute to a pension-, provident-, preservation fund or retirement annuity.

Who does it exclude?

Old generation or legacy retirement annuity policies, funds with no active participating members, and pensioners or members of provident funds that were 55 years and older on 1 March 2021 and haven’t opted to be part of the Two-Pot system.

Are there tax implications?

Every withdrawal will be added to your total taxable income. Withdrawing could also push you into a new tax bracket.

When does it take effect?

1 September 2024

Part 2: Understanding the nitty-gritty elements

How will it work?

Going forward, retirement contributions will be put into two ‘pots’: ⅓ savings component and ⅔ retirement component.

The savings pot

33% of your contributions will be allocated to this pot. You can make one withdrawal from this pot in a tax year, subject to a minimum withdrawal amount of R2 000 (before fees and taxes). Any balance of the savings component you will access on retirement.

The retirement pot

The remainder of your contributions will go into this pot. The full balance of your retirement pot must be used to purchase a pension at retirement. No withdrawals are allowed from this pot.

The ‘vested’ pot: What’s that?

You might also hear a lot of talk about a ‘vested’ component. This includes all the savings that accumulated in your retirement fund until 31 August 2024. No new money will be placed into this pot and all old rules apply, save for a few exceptions.

The Two-Pot system in practical terms

A case study

Nick is 40 years old and contributes R1 000 to his retirement fund every month, which grows annually at 10%. Nick has the option of keeping his funds untouched or withdrawing annually.

After 20 years

10% withdrawal every year: R483 000 is left by retirement
No withdrawals: R724 000 is saved by retirement

In conclusion

Using the Two-Pot system to regularly withdraw from the savings pot can have a detrimental impact on the money that’s available to you at the time of retirement.

Useful links

Click here for FAQs.
Click here to watch a recap.

Remember: This information isn’t financial advice. You should speak to your financial adviser to unpack how this new system affects you.